Greek Debt Deal, Take 43.7

By Fisher Investments Editorial Staff, 11/28/2012

Two weeks and three summits later, Greece finally received more instructions (and potentially aid) on Monday. Assuming austerity and tax reform conditions are met, Greece will receive aid payments of €43.7 billion in four installments between December 2012 and March 2013. Though the deal still needs approval from some European countries, support from the EU and IMF—and expected support from Germany, Finland and the Netherlands—suggests the deal will be accepted.

Included in the deal are promises from EU members and the IMF to help extend the amount of time Greece has to repay bondholders from previous debt auctions, as well as reducing the overall amount owed. Some had feared such “haircuts” would prove a stumbling block. But it appears eurozone officials have once again shown their willingness to bend, agreeing to a buy-back of Greek debt and offering “private investors 35 cents for each euro of bonds they hold.” The ECB will also forgo profits from cheap Greek debt, funneling them into the eurozone rescue fund (getting around EU laws restricting foreign sovereignties from directly bailing Greece out).

The deal is all aimed at Greece’s meeting renegotiated deficit reduction goals. Currently, Greece has over 170% debt to GDP, but the new deal projects that amount will fall nearer to 120% by 2020 compared to a previous 2020 estimate around 140%. The new estimate may still be higher than the IMF’s original mandate for Greek debt to be no higher than 120% of GDP by 2020, but the IMF agreed to allow some leeway with the caveat Greek debt should be no more than 110% of GDP by 2022. Assuming all goes to plan, Greece is expected to reach a primary budget surplus of 4.5% of GDP in 2016. Though these figures are all a little in flux, they illustrate the overall growing optimism surrounding Greece.

This is all grand, but we caution anyone against taking long-term projections without a heaping dose of salt. Whether Greece will comply and if that compliance yields the desired results remain to be seen. The key takeaway has been the IMF’s flexibility in this (and previous) deal negotiation sets a precedent for more flexibility in future deals—of which, no doubt, there will be many. Yet, as long as Greece continues toward its debt reduction goals, we see little reason its economic conditions will materially worsen (it’s hard to get much worse than entering your sixth year of recession in 2013) or that outside aid will stop coming.

Now, not everyone is happy with this latest deal. Greece’s opposition party leader, Alexis Tsipras, continues to claim austerity is crippling the Greek economy—supposedly making it too difficult to meet bond payments and deficit reductions goals. In one sense, Tsipras is right. Debt/financing deals won’t immediately fix what ails Greece. But the bogeyman here isn’t austerity. Rather, before the eurozone crisis (and still), Greece’s huge public sector crowded out much vibrancy from the private sector. To truly get on the road to recovery, Greece must work on being more economically competitive. Greece doesn’t have a debt problem because it has “too much debt.” It has a debt problem because creditors view it as uncompetitive and therefore a poor credit risk, making its interest costs high.

And austerity measures (done right), though painful, should help Greece’s government get out of the way, letting Greek citizens act in self-interest, under the guiding, invisible hand of capitalism—helping the Greek economy overall gain efficiency. That should help its economy grow relative to its debt and also help rein in debt costs as interest rates fall. Sure, the fairly short-term goal of debt affordability will likely be furthered by Greece’s most recent aid deal, but realistically, the sooner the country gets on the path to competitiveness, the better off Greece will be in the long term. We’ll be watching with interest.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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